Academic Forum

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Financial and soft skills

geplaatst: 21-01-2010

Financial and soft skills

Law is everywhere and everyone has to deal with it in daily life. However, maybe you have not always been aware of this. Even a simple transaction like buying bread is governed by different regimes of contract law, commercial law and liability law. The meaning of law in contemporary society cannot be underestimated. Law regulates most social aspects and influences virtually all transactions. Many laws were adopted during the last few decades. More procedures in conflicts between people are conducted. We can speak of a legalization of society. The role of government in society is growing, including the enforcement of the rule of law. In these turbulent times it seems more than necessary that politics has taken more control than in normal times.

However, with the legalization of society, banking supervision threatens to rely too much on rules instead of on behaviour of bankers. The failure of DSB Bank has shown that banking supervision needs to change.

There has been silence after the media storm around the failure of DSB. An independent research committee, led by Michel Scheltema, started in November to check, among others, whether the Autoriteit Financiële Markten (AFM) has failed as a supervisor of the conduct of business and/or De Nederlandsche Bank (DNB) as a prudential supervisor for safeguarding the liquidity and solvency of financial institutions. It can be argued, that both supervisors could have played this role better.

Concerning AFM, in an interview in Het Financiëele Dagblad (November 10th, 2009) one of its directors, Theodor Kockelkoren, pleads for more legal authority to verify the development of financial products of banks and insurers. They still make their customers believe the moon is made of cream, according to Kockelkoren. The banks often still do not act in the interest of their customer, which should be the main focus of bank's business.

An important statement, but why did the AFM not warn about misconduct sooner? The argument that they have only be allowed to call names since 2007 and that, in combination with a fine, after ample research, meaning they could only fine DSB in the recent summer does not hold. It seems that the AFM did not make use of its existing competences in the last couple of years. Therefore, its plea for more preventive instruments seems to be inappropriate. Furthermore, it is unfortunate that the AFM lumps all banks together. That undermines trust in the banking sector and creates an atmosphere of suspicion against those banks that are fighting to function flawlessly.

Besides the AFM, we need to throw more light on why and on what terms DNB as a prudential supervisor decided to grant a banking license to DSB four yours ago. Maybe, because they hoped DSB would shake up the Dutch banking landscape thoroughly. With the benefit of hindsight we know now that DNB has not set conditions severe enough for the integrity and expertise of the members of the executive and supervisory board of DSB Bank. In the future, this can be done more completely and thoroughly. After all, since January 1st, 2010 with the commencement of the Code Banking, DNB has been allowed to test not only their integrity, but also the expertise of executive and supervisory board members.

Supervision may also be improved when DNB will be more closely involved in financial institutions and will know exactly what happens inside. The prudential supervisor has to focus rather on a principle-based than on a rule-based supervision. Financial institutions should not be tested only formally, that is if they have a risk management model and formalize their risk management according to certain procedures. The supervision of DNB has become too formalistic and legalistic, because of the legalization of society and possible liability suits. DNB should rather focus particularly on the behavioral aspects of bankers, the so-called 'soft skills'. The financial world innovates very quickly, implying that the supervisor has to be very good informed about the developments in the financial industry. And especially now, this is urgent, when we need financials institutions that are aware of their role in society. Financials should not only be driven by shareholder value, but also by the interests of their other stakeholders (customers, savers and the society at large). To come to a really sustainable banking sector supervision focused on 'soft skills' of bankers, together with the check of the formal criteria, is the secret weapon for a long term sound financial sector.

Sylvester Eijffinger
in samenspraak met Annemarie Hinten (Academic Forum)